UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1 TO
FORM 10-K

 

     
(Mark One)    

 

ý

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2020

 

Or

 

o  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                          to                     

 

 

Commission File Number 000-27039

MARIJUANA COMPANY OF AMERICA, INC.
(Exact name of registrant as specified in its charter)

     
Utah
(State or other jurisdiction of
incorporation or organization)
 

98-1246221

(I.R.S. Employer
Identification No.)

 

1340 West Valley Parkway, Ste. 205
Escondido, California
(Address of principal executive offices)

 

 

92029
(Zip Code)

 

(888) 777-4362
(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

None

(Title of each class)

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value

646,883,314 Common Shares Registered as of December 31, 2020

[File No. 333-250887]

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ý    No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

  

 
 
 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer  
Non-accelerated filer ý   Smaller reporting company ý
Emerging growth company ý      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

 

The aggregate market value of the common stock held by non-affiliates, based upon the average bid and asked price of common stock, as of the last business day of the registrant’s most recently completed fiscal year was $12,801,948.

As of December 31, 2020, 3,136,774,861 shares of common stock were outstanding.

As of April 14, 2021, 4,836,957,259 shares of common stock were outstanding.

 

 

 
 
 

 

 EXPlANATORY NOTE

 

 

The sole purpose of this Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2020 of MARIJUANA COMPANY OF AMERIA, INC. (the “Company”) filed with the Securities and Exchange Commission on April 14, 2021 (the “Form 10-K”) is to incorporate the revised audit report provided by our auditors (Page F-1). At their request we are filing this amendment to incorporate the revised audit report.

No other changes have been made to the Form 10-K. This Amendment No. 1 to the Form 10-K speaks as of the original filing date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-K.

 

 

 
 
 

 

TABLE OF CONTENTS 

 

   Page
PART I
 
Item 1.  Business   4 
Item 1A.  Risk Factors   53 
Item 1B.  Unresolved Staff Comments   26 
Item 2.  Properties   26 
Item 3.  Legal Proceedings   26 
Item 4.  Mine Safety Disclosures   27 
PART II
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   27 
Item 6.  Selected Financial Data   51 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   51 
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk   68 
Item 8.  Financial Statements and Supplementary Data   69 
Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure   71 
Item 9A  Controls and Procedures   71 
Item 9B.  Other Information   73 
PART III
Item 10.  Directors, Executive Officers and Corporate Governance   73 
Item 11.  Executive Compensation   76 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   77 
Item 13.  Certain Relationships and Related Transactions, and Director Independence   79 
Item 14.  Principal Accountant Fees and Services   79 
PART IV
Item 15.  Exhibits, Financial Statement Schedules   80 
Item 16.  Form 10-K Summary   82 

 

 

 

2 
 
 

 

PART I.

 

ITEM 1. BUSINESS

 

FORWARD LOOKING STATEMENTS

 

This annual report on Form 10-K (including, but not limited to, the following disclosures regarding our Business) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this annual report on Form 10-K. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.

 

Forward-looking statements in this annual report on Form 10-K reflect our good faith judgment based on facts and factors currently known to us. Forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report on Form 10-K. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this annual report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this annual report on Form 10-K, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

Company Background – Business Overview

 

We were incorporated in the State of Utah on October 4, 1985, under the name of Mormon Mint, Inc. The corporation was originally a startup company organized to manufacture and market commemorative medallions related to the Church of Jesus Christ of Latter Day Saints. On January 5, 1999, Bekam Investments, Ltd. acquired one hundred percent of the common shares of the Company and spun the Company off changing its name Converge Global, Inc. From August 13, 1999 until November 20, 2002, the Company focused on the development and implementation of Internet web content and e-commerce applications. From 2009 to 2014, we operated primarily in the mining exploration business. In 2015, we left the mining business and began an internet-based marketing business focused on offerings from our “Majestic Menu” food service items offered to the hospitality and food service industry via an on-line internet site, where individuals could purchase retail direct from food distributors via credit cards and commercial accounts.

 

On September 4, 2015, Donald Steinberg and Charles Larsen purchased 400,000,000 shares of restricted common stock and 10,000,000 shares of the Preferred Class A stock from the Company’s President, Cornelia Volino, in exchange for $105,000.00. On September 9, 2015, Donald Steinberg was appointed Chairman of the Board, Chief Executive Officer and Secretary of the Company. Mr. Larsen was appointed to the Board of Directors. The former officers and directors of the Company resigned concurrent with the new appointments. By virtue of Messrs. Steinberg and Larsen’s stock purchase and appointment to the Company’s Board of Directors, a purchase or sale of a significant amount of assets not in the ordinary course of business and a corresponding change of control occurred. The Company reported the change of control in its September 30, 2015 quarterly report filed with the OTC Markets. Thereafter, the Company’s business plans and operations changed to focus on cannabis and legalized hemp more fully discussed in this filing. The Company changed its name to Marijuana Company of America, Inc. and trading symbol on December 1, 2015.

 

 

3 
 
 

 

Marijuana Company of America Inc. and subsidiaries is a publicly listed company quoted on OTC Markets Pink Tier under the symbol “MCOA”. We are based in Escondido, California. Our business develops, manufactures, markets and sells non-psychoactive industrial hemp, and hemp-derived consumer products containing cannabinoids (hereafter referred to as “CBD”), with a THC content of less than 0.03%. Our business includes the research and development of (1) varieties of various species of hemp; (2) beneficial uses of hemp and hemp derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and harvesting of different species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and soil; (5) different species of industrial hemp derived CBD, and the possible health benefits thereof; and, (6) new and improved methods of hemp CBD extraction omitting or eliminating the delta-9 THC molecule.

  

Principal Products and their Markets

 

hempSMART™

 

Our consumer products containing hemp and CBD are sold through our wholly owned subsidiary H Smart, Inc. under the brand name hempSMART™. We market and sell our hempSMART™ products directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates and calculates and accounts for loyalty and rewards benefits for returning customers. The Company plans on focusing its sales and marketing through direct sales on its website and intends to wind down and terminate its affiliate marketing and sales program during fiscal 2021.

 

Our current hempSMART™ wellness products offerings include the following:

 

 

4 
 
 

 

Consulting Services

 

We also provide financial accounting and property management services for companies associated with the cannabis industry in all stages of development. Our services include the following:

 

Joint Ventures and Investments

 

Our business also includes participating and making selected investments in other related businesses. The following disclosures include two parts. The first part discloses past joint ventures and investments that as of December 31, 2020 and 2019, were no longer effective and do not have a material current effect on the Company or its financial condition. These disclosures are provided to give a historical account of joint venture and investment activity over the past three to four years. The second part discloses active joint ventures and investments having a material effect on current operations and financial condition.

 

1. Past Joint Ventures & Investments

 

·GateC Joint Venture; On March 17, 2017, the Company and GateC Research, Inc. (“GateC”) entered into a Joint Venture Agreement (“Agreement”) whereby the Company committed to raise up to one and one-half million dollars ($1,500,000) over a six-month period, with a minimum commitment of five hundred thousand dollars ($500,000) within a three (3) month period; and, information establishing brands and systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies, including but not limited to its affiliate marketing program, directly tailored to the cannabis industry.

 

GateC agreed to contribute its management and control services and systems related to cannabis grow operations in Adelanto County, California, and its permit to grow marijuana in an approved zone in Adelanto, California. GateC did not own a physical site for its operation in Adelanto County, California, and GateC’s permit to grow cannabis did not contain a conditional use permit.

 

 

5 
 
 

 

On or about November 28, 2017, GateC and the Registrant orally agreed to suspend the Company’s funding commitment, pending the finalization of California State regulations governing the growth, cultivation and distribution of cannabis, which were expected to be completed in 2018.

 

On March 19, 2018, the Company and GateC rescinded the Agreement and concurrently released each other from any all any and all losses, claims, debts, liabilities, demands, obligations, promises, acts, omissions, agreements, costs and expenses, damages, injuries, suits, actions and causes of action, of whatever kind or nature, whether known or unknown, suspected or unsuspected, contingent or fixed, that they may have against each other and their Affiliates, arising out of the Agreement.

 

The Registrant incurred no termination penalties as the result of its entry into the Recession and Mutual Release Agreement.

 

In 2017, the Company recorded a debt obligation of $1,500,000 to the Joint Venture and a corresponding impairment charge of $1,500,000 during for year ended December 31, 2017. Upon termination of the material definitive agreement on March 19, 2018, the Company realized a gain on settlement of debt obligation of $1,500,000 during the six months ended June 30, 2018. As of December 31, 2018, we determined our joint venture with GateC to be fully impaired as having no intrinsic value due to our decision on March 19, 2018 to rescind the Agreement with GateC. Our decision to fully impair our venture with GateC had an impact on our reported operations in fiscal year ended December 31, 2018, but had no impact on our reported operations for the fiscal years ended December 31, 2019 and 2020.

 

 

6 
 
 

 

 

2. Current Joint Ventures  and Investments.

 

 

7 
 
 

 

As our contribution to the joint venture, the Company committed to raise not less than $1,000,000 to fund joint venture operations, based upon a funding schedule. The Company also committed to providing branding and systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies directly tailored to the cannabis industry.

The Company and Bougainville's agreement provided that funding by the Company would pay for the joint venture’s ultimate purchase of the land consisting of a one-acre parcel located in Okanogan County, Washington, for joint venture operations.

 

As disclosed on Form 8-K on December 11, 2017, the Company did not comply with the funding schedule for the joint venture. On November 6, 2017, the Company and Bougainville amended the joint venture agreement to reduce the amount of the Company's commitment from $1,000,000 to $800,000, and also required the Company to issue Bougainville 15 million shares of the Company's restricted common stock. The Company completed its payments pursuant to the amended agreement on November 7, 2017, and on November 9, 2017, issued to Bougainville 15 million shares of restricted common stock. The amended agreement provided that Bougainville would deed the real property to the joint venture within thirty days of its receipt of payment.

Thereafter, the Company determined that Bougainville had no ownership interest in the property in Washington State, but rather was a party to a purchase agreement for real property that was in breach of contract for non-payment. Bougainville also did not possess an agreement with a Tier 3 I502 license holder to grow Marijuana on the property. Nonetheless, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green Ventures Capital Corp., purchased the land, but did not deed the real property to the joint venture. Bougainville failed to pay delinquent property taxes to Okanogan County and to date, the property has not been deeded to the joint venture.

 

To clarify the respective contributions and roles of the parties, the Company offered to enter into good faith negotiations to revise and restate the joint venture agreement with Bougainville. The Company diligently attempted to communicate with Bougainville to accomplish a revised and restated joint venture agreement, and efforts towards satisfying the conditions to complete the subdivision of the land by the Okanogan County Assessor. However, Bougainville failed to cooperate or communicate with the Company in good faith, and failed to pay the delinquent taxes on the real property that would allow for sub-division and the deeding of the real property to the joint venture.

 

8 
 
 

 

 

On August 10, 2018, the Company advised its independent auditor that Bougainville did not cooperate or communicate with the Company regarding its requests for information concerning the audit of Bougainville’s receipt and expenditures of $800,000 contributed by the Company in the joint venture agreement. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally, the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded to the joint venture; (ii) it had an agreement with a Tier 3 # I502 cannabis license holder to grow cannabis on the real property; and, (iii) that clear title to the real property associated with the Tier 3 # I502 license would be deeded to the joint venture thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed suit against Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court, case number 18-2- 0045324. The Company’s complaint seeks legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in the name of the Company, for the appointment of a receiver, the return to treasury of 15 million shares issued to Bougainville, and, for treble damages pursuant to the Consumer Protection Act in Washington State. The registrant has filed a lis pendens on the real property. The case is currently in litigation.

In connection with the agreement, the Company recorded a cash investment of $1,188,500 to the Joint Venture during 2017. This was comprised of 49.5% ownership of BV-MCOA Management LLC, and was accounted for using the equity method of accounting. The Company recorded an annual impairment in 2017 of $792,500, reflecting the Company’s percentage of ownership of the net book value of the investment. During 2018, the Company recorded equity losses of $37,673 and $11,043 for the first and second quarters respectively, and recorded an annual impairment of $285,986 for the year ended December 31, 2018, at which time the Company determined the investment to be fully impaired due to Bougainville’s breach of contract and resulting litigation, as discussed above.

 

·Share Exchange with Cannabis Global, Inc. On September 30, 2020, the Company entered into a securities exchange agreement with Cannabis  Global, Inc., a Nevada corporation. By virtue of the agreement, the Company issued 650,000,000 shares of its unregistered common stock to Cannabis Global in exchange for 7,222,222 shares of Cannabis Global unregistered common stock. The Company and Cannabis Global also entered into a lock up leak out agreement which prevents either party from sales of the exchanged shares for a period of 12 months. Thereafter the parties may sell not more than the quantity of shares equaling an aggregate maximum sale value of $20,000 per week, or $80,000 per month until all Shares and Exchange Shares are sold. This material transaction involves related parties, insofar as Edward Manolos, our director, is also a director of Cannabis Global, Inc.

 

9 
 
 

 

The following table indicates the amount of impairments recorded by the Company quarter to quarter for investment activity quarter to quarter related to its joint venture investments:

 

MARIJUANA COMPANY OF AMERICA, INC.

INVESTMENT ROLL-FORWARD

AS OF DECEMBER 31, 2020

 

  INVESTMENTS  SHORT-TERM INVESTMENTS
                                    
   TOTAL  Global Hemp  Cannabis Global        Bougainville Ventures,  Gate C Research  Natural Plant     TOTAL Short-Term  Global Hemp   
   INVESTMENTS  Group  Inc.  Benihemp  MoneyTrac  Inc.  Inc.  Extract  Vivabuds  Investments  Group  MoneyTrac
Beginning balance @12-31-16  $0   $0        $0   $0   $0   $0             $0        $0 
                                                             
Investments made during 2017   3,049,275    10,775         100,000    250,000    1,188,500    1,500,000              0         0 
                                                             
Quarter 03-31-17 equity method Loss   0                                            0           
                                                             
Quarter 06-30-17 equity method Loss   0                                            0           
                                                             
Quarter 09-30-17 equity method Loss   (375,000)                       (375,000)                  0           
                                                             
Quarter 12-31-17 equity method accounting   313,702                        313,702                   0           
                                                             
Impairment of Investment in 2017   (2,292,500)   0                   (792,500)   (1,500,000)             0         0 
Balances as of 12/31/17   695,477    10,775    0    100,000    250,000    334,702    0    0    0    0    0    0 
                                                             
Investments made during 2018   986,654    986,654                                       0           
                                                             
Quarter 03-31-18 equity method Loss   (37,673)                       (37,673)                  0           
                                                             
Quarter 06-30-18 equity method Loss   (11,043)                       (11,043)                  0           
                                                             
Quarter 09-30-18 equity method Loss   (10,422)             (10,422)                            0           
                                                             
Quarter 12-31-18 equity method Loss   (31,721)   (31,721)        0                             0           
                                                             
Moneytrac investment reclassified to Short-Term investments   (250,000)                  (250,000)                       250,000         250,000 
                                                             
Unrealized gains on trading securities - 2018   0                                            560,000         560,000 
                                                             
Impairment of investment in 2018   (933,195)   (557,631)        (89,578)        (285,986)                  0           
Balance @12-31-18  $408,077   $408,077   $0   $0   $0   $0   $0   $0   $0   $810,000   $0   $810,000 

 

 

10 
 
 

 

 

  INVESTMENTS  SHORT-TERM INVESTMENTS
                                    
   TOTAL  Global Hemp  Cannabis Global        Bougainville Ventues,  Gate C Research  Natural Plant     TOTAL Short-Term  Global Hemp   
   INVESTMENTS  Group  Inc.  Benihemp  MoneyTrac  Inc.  Inc.  Extract  Vivabuds  Investments  Group  MoneyTrac
Investments made during quarter ended 03-31-19   129,040    129,040                                                   
                                                             
Quarter 03-31-19 equity method Loss   (59,541)   (59,541)                                                  
                                                             
Unrealized gains on trading securities - quarter ended 03-31-19                                                (135,000)       $(135,000)
Balance @03-31-19  $477,576   $477,576   $0   $0   $0   $0   $0   $0   $0   $675,000   $0   $675,000 
                                                             
Investments made during quarter ended 06-30-19  $3,157,234   $83,646                            $3,000,000   $73,588                
                                                             
Quarter 06-30-19 equity method Income (Loss)  ($171,284)  ($141,870)                           $(6,291)  $(23,123)               
                                                             
Unrealized gains on trading securities - quarter ended 06-30-19  $0                                            (150,000)       $(150,000)
Balance @06-30-19  $3,463,526   $419,352   $0   $0   $0   $0   $0   $2,993,709   $50,465   $525,000   $0   $525,000 
                                                             
Investments made during quarter ended 09-30-19  $186,263                                      $186,263                
                                                             
Quarter 09-30-19 equity method Income (Loss)  $122,863   $262,789                            $(94,987)  $(44,939)               
                                                             
Sale of trading securities during quarter ended 09-30-19                                               $(41,667)       $(41,667)
                                                             
Unrealized gains on trading securities - quarter ended 09-30-19  $0                                            (362,625)       $(362,625)
Balance @09-30-19  $3,772,652   $682,141   $0   $0   $0   $0   $0   $2,898,722   $191,789   $120,708   $0   $120,708 

 

 

11 
 
 

 

 

  INVESTMENTS  SHORT-TERM INVESTMENTS
                                    
   TOTAL  Global Hemp  Cannabis Global        Bougainville Ventues,  Gate C Research  Natural Plant     TOTAL Short-Term  Global Hemp   
   INVESTMENTS  Group  Inc.  Benihemp  MoneyTrac  Inc.  Inc.  Extract  Vivabuds  Investments  Group  MoneyTrac
Investments made during quarter ended 12-31-19  $392,226   $262,414                                 $129,812                
                                                             
Quarter 12-31-19 equity method Income (Loss)  $(178,164)  $(75,220)                           $(23,865)  $(79,079)               
                                                             
Reversal of Equity method Loss for 2019  $272,285                                 $125,143   $147,142                
                                                             
Impairment of investment in 2019  $(3,175,420)  $(869,335)                           $(2,306,085)  $0                
                                                             
Loss on disposition of investment  $(389,664)                                     $(389,664)               
                                                             
Sale of trading securities during quarter ended 12-31-19  $0                                           $(17,760)       $(17,760)
                                                             
Unrealized gains on trading securities - quarter ended 12-31-19  $0                                            (75,545)       $(75,545)
Balance @12-31-19  $693,915   $(0)  $0   $0   $0   $0   $0   $693,915   $0   $27,403   $0   $27,403 
                                                             
Equity Loss for Quarter ended 03-31-20   126,845    126,845                                                   
                                                             
Recognize Joint venture liabilities per JV agreement @03-31-20   394,848    394,848                                                   
                                                             
Impairment of Equity Loss for Quarter ended 03-31-20   (521,692)   (521,692)                                                  
                                                             
Unrealized gains on trading securities - quarter ended 03-31-19                                                (13,945)       $(13,945)
Balance @03-31-20  $693,915   $0   $0   $0   $0   $0   $0   $693,915   $0   $13,458   $0   $13,458 

 

 

 

12 
 
 

 

 

  INVESTMENTS  SHORT-TERM INVESTMENTS
                                    
   TOTAL  Global Hemp  Cannabis Global        Bougainville Ventues,  Gate C Research  Natural Plant     TOTAL Short-Term  Global Hemp   
   INVESTMENTS  Group  Inc.  Benihemp  MoneyTrac  Inc.  Inc.  Extract  Vivabuds  Investments  Group  MoneyTrac
Equity Loss for Quarter ended 06-30-20   (7,048)   (7,048)                                                  
                                                             
Impairment of Equity Loss for Quarter ended 06-30-20   7,048    7,048                                                   
                                                             
Sales of of trading securities - quarter ended 06-30-20                                                (13,458)       $(13,458)
Balance @06-30-20  $693,915   $0   $0   $0   $0   $0   $0   $693,915   $0   $0   $0   $0 
                                                             
Global Hemp Group trading securities issued   650,000        $650,000                                 $185,000   $185,000      
                                                             
Investment in Cannabis Global   0                                                        
Balance @09-30-20  $1,343,915   $0   $650,000   $0   $0   $0   $0   $693,915   $0   $185,000   $185,000   $0 
                                                             
Unrealized gain on Global Hemp Group securities - 4th Quarter 2020                                               $54,064   $54,064      
                                                             
Unrealized gains on Cannabis Global Inc securities - 4th Quarter 2020   208,086        $208,086                                              
Balance @12-31-20  $1,552,001   $0   $858,086   $0   $0   $0   $0   $693,915   $0   $239,064   $239,064   $0 

 

 

 

13 
 
 

 

 

The following table indicates the amount of debt the Company recorded quarter to quarter as a result of its joint venture investments:

 

Loan Payable
                                                
    TOTAL    Global Hemp              Bougainville Ventues,    Gate C Research    Natural Plant     Robert L Hymers         General Operating 
    JV Debt    Group    Benihemp    MoneyTrac     Inc.     Inc.    Extract     III    Vivabuds    Expense 
Beginning balance @12-31-16  $0   $0   $0   $0   $0   $0                  $0 
                                                   
Quarter 03-31-17 loan borrowings   1,500,000                        1,500,000                     
                                                   
Quarter 06-30-17 loan activity                                                  
                                                   
Quarter 09-30-17 loan borrowings   725,000                   725,000                          
                                                   
Quarter 12-31-17 loan repayments   (330,445)                  (330,445)                         
                                                   
General operational expense   172,856                                            172,856 
Balances as of 12/31/17 (a)   2,067,411    0    0    0    394,555    1,500,000    0    0    0    172,856 
                                                   
Quarter 03-31-18 loan borrowings (payments)   376,472    447,430                                       (70,958)
                                                   
Quarter 06-30-18 cancellation of JV debt obligation   (1,500,000)                       (1,500,000)                    
                                                   
Quarter 06-30-18 loan repayments   (101,898)                                           (101,898)
                                                   
Quarter 09-30-18 loan activity   0                                              
                                                   
Quarter 12-31-18 loan borrowings   580,425    580,425                                         
Balance @12-31-18   (b)   1,422,410    1,027,855    0    0    394,555    0    0    0    0    0 

 

14 
 
 

 

 

Loan Payable
                                                
    TOTAL    Global Hemp              Bougainville Ventues,    Gate C Research    Natural Plant     Robert L Hymers         General Operating 
    JV Debt    Group    Benihemp    MoneyTrac     Inc.     Inc.    Extract     III    Vivabuds    Expense 
Quarter 03-31-19 loan borrowings   649,575    649,575                                         
                                                   
Quarter 03-31-19 debt conversion to equity   (407,192)   (407,192)                                        
Balance @03-31-19  ©   1,664,793    1,270,238    0    0    394,555    0    0    0    0    0 
                                                   
Quarter 03-31-19 loan borrowings   3,836,220   $161,220                       $2,000,000        $0   $1,675,000 
                                                   
Quarter 03-31-19 debt conversion to equity   (1,572,971)  $(161,220)                      $(349,650)            $(1,062,101)
Balance @06-30-19   (d)   3,928,042    1,270,238    0    0    394,555    0    1,650,350    0    0    612,899 
                                                   
Quarter 09-30-19 loan borrowings   582,000                                           $582,000 
                                                   
Quarter 09-30-19 debt conversion to equity   (187,615)                                          $(187,615)
Balance @09-30-19   (e)   4,322,427    1,270,238    0    0    394,555    0    1,650,350    0    0    1,007,284 
                                                   
Quarter 12-31-19 loan borrowings   2,989,378   $262,414                       $596,784   $4,221        $2,125,959 
                                                   
Impairment of investment in 2019   (4,083,349)  $(1,532,652)            $(394,555)       $(2,156,142)               
                                                   
Loss on settlement of debt in 2019   50,093                            $50,093                
                                                   
Adjustment to reclassify amount to accrued liabilities   (85,000)                           $(85,000)               
Balance @12-31-19   (f)  $3,193,548   $(0)  $0   $0   $0   $0   $56,085   $4,221   $0   $3,133,243 

 

 

15 
 
 

 

 

Loan Payable
                                                
    TOTAL    Global Hemp              Bougainville Ventues,    Gate C Research    Natural Plant     Robert L Hymers         General Operating 
    JV Debt    Group    Benihemp    MoneyTrac     Inc.     Inc.    Extract     III    Vivabuds    Expense 
Quarter 03-31-20 loan borrowings  $441,638                                           $441,638 
                                                   
Quarter 03-31-20 debt conversion to equity  $(619,000)                                          $(619,000)
                                                   
Recognize Joint venture liabilities per JV agreement @03-31-20  $394,848   $394,848                                         
                                                   
Quarter 03-31-20 Debt Discount adjustments  $24,138                                 $24,138           
Balance @03-31-20  (g)  $3,435,172   $394,848   $0   $0   $0   $0   $56,085   $28,359   $0   $2,955,881 
                                                   
Quarter 06-30-20 loan borrowings, net  $65,091                                 $65,091           
                                                   
Quarter 06-30-20 debt conversion to equity  ($727,118)                                          $(727,118)
                                                   
Quarter 06-30-20 reclass of liability  $83,647   $83,647                                         
                                                   
Quarter 06-30-20 Debt Discount adjustments  $405,746                                 $(27,715)       $433,461 
Balance @06-30-20  (h)  $3,262,538   $478,495   $0   $0   $0   $0   $56,085   $65,735   $0   $2,662,224 
                                                   
Quarter 09-30-20 debt conversion to equity  $(606,472)                           $(56,085)  $(65,735)       $(484,652)
                                                   
Debt Settlement during Q3 2020  $(474,495)  $(474,495)                                        
Balance @09-30-20  (i)  $2,181,571   $4,000   $0   $0   $0   $0   ($0)  $0   $0   $2,177,572 
                                                   
Quarter 12-31-20 loan borrowings, net  $309,675                                           $309,675 
                                                   
Quarter 12-31-20 Debt Discount adjustments  $(71,271)                                          $(71,271)
                                                   
Quarter 12-31-20 debt conversion to equity  $(993,081)                                          $(993,081)
Balance @12-31-20  (j)  $1,426,894   $4,000   $0   $0   $0   $0   ($0)  $0   $0   $1,422,895 

 

 

 

   12-31-20  09-30-20  06-30-20  03-31-20  12-31-19  09-30-19  06-30-19  03-31-19  12-31-18  12-31-17
This includes balances for:   Note (j)    Note (i)    Note (h)    Note (g)    Note (f)    Note (e)    Note (d)    Note (c)    Note (b)    Note (a) 
      - Debt obligation of JV   0    0    478,494    394,848    0    1,633,872    1,778,872    128,522    289,742    1,500,000 
      - Convertible NP, net of discount   1,426,894    2,181,571    2,784,044    3,040,324    3,193,548    2,688,555    2,149,170    1,536,271    1,132,668    394,555 
      - Longterm debt   0    0    0    0    0    0    0    0    0    172,856 
Total Debt balance   1,426,894    2,181,571    3,262,538    3,435,172    3,193,548    4,322,427    3,928,042    1,664,793    1,422,410    2,067,411 

 

 

16 
 
 

 

Recent US Government Decriminalization and Legalization of Hemp

 

On December 20, 2018, President Donald J. Trump signed into law the Agriculture Improvement Act of 2018, otherwise known as the “Farm Bill.” Prior to its passage, hemp, a member of the cannabis family, and hemp derived CBD, were classified as Schedule 1 controlled substances, and so illegal under the Controlled Substances Act, 21 U.S.C. § 811 (hereafter referred to as the “CSA”).

 

With the passage of the Farm Bill, hemp cultivation is now broadly permitted. The Farm Bill explicitly allows the transfer of hemp-derived products across state lines for commercial or other purposes. It also puts no restrictions on the sale, transport, or possession of hemp-derived products, so long as those items are produced in a manner consistent with the law.

 

Under Section 10113 of the Farm Bill, hemp cannot contain more than 0.3 percent THC, the chemical compound found in cannabis that produces the psychoactive “high” associated with cannabis. Any cannabis plant that contains more than 0.3 percent THC would be considered non-hemp cannabis—or marijuana—illegal under the CSA.

 

Additionally, there will be significant, shared state-federal regulatory power over hemp cultivation and production. Under Section 10113 of the Farm Bill, state departments of agriculture must consult with the state’s governor and chief law enforcement officer to devise a plan that must be submitted to the Secretary of the United States Department of Agriculture (hereafter referred to as the “USDA”). A state’s plan to license and regulate hemp can only commence once the Secretary of USDA approves that state’s plan. In states opting not to devise a hemp regulatory program, USDA will construct a regulatory program under which hemp cultivators in those states must apply for licenses and comply with a federally-run program. This system of shared regulatory programming is similar to options states had in other policy areas such as health insurance marketplaces under Affordable Care Act, or workplace safety plans under Occupational Health and Safety Act—both of which had federally-run systems for states opting not to set up their own systems. 

 

The Farm Bill outlines actions that are considered violations of federal hemp law (including such activities as cultivating without a license or producing cannabis with more than 0.3 percent THC). The Farm Bill details possible punishments for such violations, pathways for violators to become compliant, and even which activities qualify as felonies under the law, such as repeated offenses.

One of the goals of the previous 2014 Farm Bill was to generate and protect research into hemp. The 2018 Farm Bill continues this effort. Section 7605 re-extends the protections for hemp research and the conditions under which such research can and should be conducted. Further, section 7501 of the Farm Bill extends hemp research by including hemp under the Critical Agricultural Materials Act. This provision recognizes the importance, diversity, and opportunity of the plant and the products that can be derived from it, but also recognizes that there is a still a lot to learn about hemp and its products from commercial and market perspectives.

We currently operate two divisions within the regulated hemp industry: (i) the development, manufacturing, marketing and sale of our hempSMART consumer products that include non-psychoactive industrial hemp-based CBD as an ingredient; and, (ii) professional financial consulting and property management services.

 

On April 15, 2019, we entered into a joint venture with Natural Plant Extract of California, Inc., and subsidiaries, to operate a licensed psychoactive cannabis distribution service in California, who legalized THC psychoactive cannabis for medicinal and recreational use on January 1, 2018. As disclosed in greater detail below, on February 3, 2020, we terminated the joint venture. As of the date of this filing, we do not conduct any business in the psychoactive cannabis markets in those states that have legalized cannabis for medicinal or recreational use.

 

Brazilian Law Regarding Cannabis and Hemp

 

Brazilian law currently prohibits cannabis cultivation, processing, and sales. This restriction applies to both marijuana and industrial hemp. There is no distinction between hemp and marijuana. As a result, there is no specific legislation on industrial hemp. However, on August 18, 2020, draft legislation was introduced that would allow Brazilian farmers to grow cannabis for medical and industrial purposes on domestic soil for the first time has been submitted to the country’s lower house of Congress. The bill was delivered to the House of Deputies speaker by lawmakers Paulo Teixeira and Luciano Ducci, co-sponsors of the bill who sit on the chamber’s special commission for the regulation of medicinal cannabis. Action is pending on this legislation.

 

17 
 
 

 

 

Uruguayan Law on Cannabis

 

Cannabis is legal in Uruguay, and is one of the most widely used drugs in the nation. President Jose Mujica signed legislation to legalize recreational cannabis in December 2013, making Uruguay the first country in the modern era to legalize cannabis. Uruguay has an established market that the Company intends to enter and compete in.

 

Sales and Marketing

 

We market and sell our services and products throughout the United States consistent with the Farm Bill, as well as in Canada and in the United Kingdom. We intend to expand our offerings as additional countries and jurisdictions who adopt state-regulated or government programs like the Farm Bill. We market and sell our hempSMARTproducts directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates and calculates and accounts for loyalty and rewards benefits for returning customers. The Company plans on focusing its sales and marketing through direct sales on its website and intends to wind down and terminate its affiliate marketing and sales program during fiscal 2021.

 

On March 21, 2019, our wholly owned subsidiary, hempSMART, Ltd., a corporation organized in the United Kingdom, officially launched the sales efforts for the Company’s industrial hemp CBD formulated hempSMART™ products in the United Kingdom. As of the date of this filing, our sales efforts in the UK are accomplished through our affiliate marketing program.

 

On October 1, 2020, we entered into two Joint Venture Agreements with Marco Guerrero, a director of the Company, dated September 30, 2020, to form joint venture operations in Brazil and in Uruguay to produce, manufacture, market and sell the Company’s hempSMART™ products in Latin America, and will also work to develop and sell hempSMART™ products globally. The Joint Venture Agreements contain equal terms for the formation of joint venture entities in Uruguay and Brazil. The Brazilian joint venture will be headquartered in São Paulo, Brazil, and will be named HempSmart Produtos Naturais Ltda. (“HempSmart Brazil”). The Uruguayan joint venture will be headquartered in Montevideo, Uruguay and will be named Hempsmart Uruguay S.A.S. (“HempSmart Uruguay”). Both are in the development stage.

 

Research and Development

 

Our research and development activity for the fiscal year ended December 31, 2020 was primarily focused on formulations of our various hempSMARTproducts. Our research and development costs were $0. We may conduct additional research and development as the Company expands its hempSMARTline of products.

 

Significant Customers

 

Sales of our hempSMARTproducts, both directly by us and through our affiliate marketing sales program and directly on our website, have not resulted in reportable significant customers.

 

Intellectual Property

 

On February 12, 2019, the U. S. Patent Office issued patent number 10,201,553 for the Company’s hempSMARTBrain product. On October 3, 2016, H Smart, Inc. filed a trademark application with the U.S. Patent and Trademark Office for the tradename hempSMART™, Application No. 87/531,833. The trademark has not yet been registered, and the application is pending.

 

18 
 
 

 

Competition

 

Our competitors include sellers of hemp-based CBD products and professional services firms dedicated to the regulated hemp industry. We compete in markets where hemp has been legalized and regulated, which includes the United States, Canada and the United Kingdom. Our marketing efforts in Brazil and Uruguay are in the development stages. We expect that the quantity and composition of our competitive environment will continue to evolve as the global industry matures. Additionally, increased competition worldwide is possible to the extent that new states, jurisdictions and countries enter the marketplace as a result of continued enactment of regulatory and legislative changes that de-criminalize and regulate hemp products, including the 2018 Farm Bill. We believe that by being well established in the industry, along with our experience, and our continued expansion of service and product offerings in new and existing locations, are factors that mitigate the risks associated with operating in a developing competitive environment. Additionally, the contemporaneous growth of the industry as a whole will result in new customers entering the marketplace, thereby further mitigating the impact of competition on our expected operations and results.

 

Employees

 

As of December 31, 2020, we had 4 full-time employees.

 

ITEM 1A. RISK FACTORS

 General risk relating to COVID-19 pandemic

The novel coronavirus (COVID-19) pandemic may have an expected effect on our business, financial condition and results of operations.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, supply chains, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn across many global economies.

The COVID-19 pandemic has rapidly escalated in the United States, creating significant uncertainty and economic disruption, and leading to record levels of unemployment nationally. Numerous state and local jurisdictions have imposed, and others in the future may impose as variants of the virus proliferate, shelter-in-place orders, quarantines, shut-downs of non-essential businesses, and similar government orders and restrictions on their residents to control the spread of COVID-19. Such orders or restrictions have resulted in temporary facility closures, work stoppages, slowdowns and travel restrictions, among other effects, thereby adversely impacting our operations. In addition, we expect to be impacted by a downturn in the United States economy, which could have an adverse impact on discretionary consumer spending and may have a significant impact on our business operations and/or our ability to generate revenues and profits.

In response to the COVID-19 disruptions, we have implemented a number of measures designed to protect the health and safety of our staff and contractors. These measures include restrictions on non-essential business travel, the institution of work-from-home policies wherever feasible and the implementation of strategies for workplace safety at our facilities that remain open. We are following the guidance from public health officials and government agencies, including implementation of enhanced cleaning measures, social distancing guidelines and wearing of masks.

The extent to which COVID-19 ultimately impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity and duration of the COVID-19 outbreak and the effectiveness of actions taken to contain the COVID-19 outbreak or treat its impact, among others. Additionally, while the extent to which COVID-19 ultimately impacts our operations will depend on a number of factors, many of which will be outside of our control. The COVID-19 outbreak is evolving and new information emerges daily; accordingly, the ultimate consequences of the COVID-19 outbreak cannot be predicted with certainty. In addition to the COVID-19 disruptions possibility adversely impacting our business and financial results, they may also have the effect of heightening many of the other risks described in “Risk Factors,” including risks relating to changes due to our limited operating history; our ability to generate sufficient revenue, to generate positive cash flow; our relationships with third parties, and many other factors. We will endeavor to minimize these impacts, but there can be no assurance relative to the potential impacts that may be incurred.

19 
 
 

 

Risks Related to Our Business

The Farm Bill recently passed, and undeveloped shared state-federal regulations over hemp cultivation and production may impact our business.

The Farm Bill was signed into law on December 20, 2018. Under Section 10113 of the Farm Bill, state departments of agriculture must consult with the state’s governor and chief law enforcement officer to devise a plan that must be submitted to the Secretary of USDA. A state’s plan to license and regulate hemp can only commence once the Secretary of USDA approves that state’s plan. In states opting not to devise a hemp regulatory program, USDA will need to construct a regulatory program under which hemp cultivators in those states must apply for licenses and comply with a federally-run program. The details and scopes of each state’s plans are not fully known at this time and may contain varying regulations that may impact our business. Even if a state creates a plan in conjunction with its governor and chief law enforcement officer, the Secretary of the USDA must approve it. There can be no guarantee that any state plan will be approved. Review times may be extensive. There may be amendments and the ultimate plans, if approved by states and the USDA, may materially limit our business depending upon the scope of the regulations.

Laws and regulations affecting our industry to be developed under the Farm Bill are in development.

As a result of the Farm Bill’s recent passage, laws and regulations affecting the hemp industry will evolve which could detrimentally affect our operations. Local, state and federal hemp laws and regulations may be broad in scope and subject to changing interpretations. These changes may require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result in a material adverse effect on our operations. In addition, we cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to our business.

Psychoactive Cannabis and derivatives are illegal under the CSA.

Psychoactive Cannabis and derivatives are Schedule 1 controlled substances and are illegal under the CSA. Even in states that have legalized the use of Psychoactive Cannabis, its sale and use remain violations of federal law. The illegality of Psychoactive Cannabis under the CSA preempts state laws that legalize its use. Therefore, strict enforcement of the CSA regarding Psychoactive Cannabis and derivatives would likely result in Natural Plant Extracts of California, Inc.’s inability to proceed with its business plans involving operating a psychoactive cannabis delivery service in California. This event would cause us to suffer losses related to our 5% interest in Natural Plant Extracts of California, Inc.

Risk of government action.

While we will use our best efforts to comply with all laws and regulations, there is a possibility that governmental action to enforce any alleged violations may result in legal fees and damage awards that would adversely affect us.

We anticipate our operating expenses will increase, and we may never achieve profitability.

We launched our first hempSMART™ product, hempSMART Brain™, in November 2016. Since then, we have introduced a number of other consumer products, including hempSMART Pain™, hempSMART™ Full Spectrum Pet Drops™, and hempSMART™ Full Spectrum Drops™. As we continue to produce other hempSMART™ products, we anticipate increases in our operating expenses, without realizing significant revenues from operations. Within the next 12 months, these increases in expenses will be attributed to the cost of (i) general and administrative, (ii) new research and development, (iii) advertising and website development, (iv) legal and accounting fees at various stages of operation, (v) joint venture activities, (vi) creating and maintaining distribution and supply chain channels.

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As a result of some or all of these factors in combination, we will incur significant financial losses in the foreseeable future. There is no history upon which to base any assumption as to the likelihood that our Company will prove successful. We cannot provide investors with any assurance that our business will attract customers and investors. If we are unable to address these risks, there is a high probability that our business will fail.

Because our business is dependent upon continued market acceptance by consumers, any negative trends will adversely affect our business operations.

We are substantially dependent on continued market acceptance and proliferation of consumers of hemp and hemp-derived CBD. We believe that as hemp and hemp-derived CBD becomes more accepted as a result of the passage of the Farm Bill, the stigma associated with hemp and CBD will diminish and as a result consumer demand will continue to grow. While we believe that the market and opportunity in the hemp space continues to grow, we cannot predict the future growth rate and size of the market. Any negative outlook on the hemp industry will adversely affect our business operations.

The possible FDA Regulation of hemp and industrial hemp derived CBD, and the possible registration of facilities where hemp is grown and CBD products are produced, if implemented, could negatively affect the hemp industry generally, which could directly affect our financial condition.

The Farm Bill established that hemp containing less the 0.3% THC was no longer a Schedule 1 drug under the CSA. Previously, the U.S. Food and Drug Administration (“FDA”) did not approve hemp or CBD derived from hemp as a safe and effective drug for any indication. The FDA considered hemp and hemp-derived CBD as illegal Schedule 1 drugs. Further, the FDA has concluded that products containing hemp or CBD derived from hemp are excluded from the dietary supplement definition under sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug & Cosmetic Act, respectively. However, as a result of the passage of the Farm Bill, at some indeterminate future time, the FDA may choose to change its position concerning products containing hemp, or CBD derived from hemp, and may choose to enact regulations that are applicable to such products, including, but not limited to: the growth, cultivation, harvesting and processing of hemp; regulations covering the physical facilities where hemp is grown and processed; and possible testing to determine efficacy and safety of hemp derived CBD. In this hypothetical event, our hemp-based hempSMART™ products containing CBD may be subject to regulation. In the hypothetical event that some or all of these regulations are imposed, we do not know what the impact would be on the hemp industry in general, and what costs, requirements and possible prohibitions may be enforced. If we are unable to comply with the conditions and possible costs of possible regulations and/or registration as may be prescribed by the FDA, we may be unable to continue to operate our business.

Laws governing our access to banking services remain uncertain and are in a state of flux.

On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed cannabis businesses. A memorandum issued by the Justice Department to federal prosecutors re-iterated guidance previously given, this time to the financial industry, that banks can do business with legal cannabis businesses and “may not” be prosecuted. We believe this applies to hemp and to Psychoactive Cannabis. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidelines to banks that “it is possible to provide financial services” to state-licensed cannabis (and hemp) businesses and still be in compliance with federal anti-money laundering laws. These provisions created barriers to our banking operations. With the passage of the Farm Bill, we expect that the banking industry will be more open to doing business with compliant hemp businesses. Currently, the U.S. Congress is considering the Secure and Fair Enforcement Banking Act sponsored by Reps. Ed Perlmutter (D-CO) Denny Heck (D-WA), Steve Stivers (R-OH) and Warren Davidson (R-OH) filed in March, 2019 designed to protect banks that service the marijuana industry from being penalized by federal regulators. The act currently has 138 cosponsors—more than a quarter of the House. However, this may take time and may not result in a more open banking climate. We expect that banks will be more open to serving cannabis and hemp businesses, but there is no guarantee – even with the passage of the Farm Bill.

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Banking regulations in our business are costly and time consuming.

In assessing the prospective risk of providing services to a hemp-related business, a financial institutions may conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its cannabis-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold; (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available. These regulatory reviews may be time consuming and costly.

Due to our involvement in the hemp industry and the Psychoactive Cannabis delivery business, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liability.

Insurance that is otherwise readily available, such as general liability, and directors and officer’s insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.

The Company’s industry is highly competitive, and we have less capital and resources than many of our competitors which may give them and advantage in developing and marketing products similar to ours or make our products obsolete.

We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative hemp products and derivatives, who may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products less desirable to consumers or obsolete. There can be no assurance that we will be able to successfully compete against these other entities.

We may be unable to respond to the rapid technological change in the industry and such change may increase costs and competition that may adversely affect our business.

Rapidly changing technologies, frequent new product and service introductions and evolving industry standards characterize our market. The continued growth of the Internet and intense competition in our industry exacerbates these market characteristics. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance features and reliability of our hempSMART™ products. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of our hempSMART™ products. In addition, any new enhancements must meet the requirements of our current and prospective customers and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our hempSMART™ products and services or infrastructures to adapt to these changes.

We also expect that new competitors may introduce products or services that are directly or indirectly competitive with us. These competitors may succeed in developing, products and services that have greater functionality or are less costly than our products and services and may be more successful in marketing such products and services. Technological changes have lowered the cost of operating communications and computer systems and purchasing software. These changes reduce our cost of selling products and providing services, but also facilitate increased competition by reducing competitors’ costs in providing similar services. This competition could increase price competition and reduce anticipated profit margins.

 

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Our hempSMART™ products are relatively new and our industry is rapidly evolving.

Due consideration must be given to our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies in their early stage of development, particularly companies in the rapidly evolving legal cannabis and hemp industries. To be successful we must, among other things:

•       Develop, manufacture and introduce new attractive and successful consumer products in our hempSMART™ brand.

•       Attract and maintain a large customer base and develop and grow that customer base.

•       Increase awareness of our hempSMART™ brand and develop effective marketing strategies to insure consumer loyalty.

•       Establish and maintain strategic relationships with key sales, marketing, manufacturing and distribution providers.

•       Respond to competitive and technological developments.

•       Attract, retain and motivate qualified personnel.

We may be unable to fully capture the expected value from our new joint venture operations in Brazil and Uruguay.

In connection with our entry into new joint ventures in Brazil and Uruguay, we face numerous risks and uncertainties, including effectively integrating our respective personnel, management controls and business relationships into an effective and cohesive operation. Further, we are subject to additional risks and uncertainties because we may be dependent upon, and subject to, liability losses or damages relating to system controls and personnel that are not under our control. The joint venture business may be subject to unforeseeable negative market conditions, economic downturns, and legal and political considerations in Brazil and Uruguay. While cannabis and hemp are legalized in Uruguay, Brazil is only considering legalization as of the date of this filing, and legalization there is not guaranteed.

Our joint ventures in Brazil and Uruguay will rely significantly upon the activities of our joint venture partners. We will rely upon our joint venture partner’s Brazilian and Uruguayan personnel, business acumen, experience and involvement to seek economic success and the joint ventures’ compliance with applicable Brazilian and Uruguayan laws.

If we are unable to integrate and monitor our Brazilian and Uruguayan joint ventures successfully and efficiently, there is a risk that our results of operations, financial condition and cash flows may be materially and adversely affected. In addition, conflicts or disagreements between us and our joint venture partners in Brazil and Uruguay may negatively impact the benefits to be achieved by the relevant joint venture. There is no assurance that our joint ventures will be successfully integrated or yield all of the positive benefits anticipated.

Our joint venture investments in Latin America, and other joint venture investments that we make in the future, could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and liquidity and disputes between us and our co-venturers.

In addition to our new joint venture projects in Brazil and Uruguay, which are in development stage, will require financial investment on our part, and have not yet generated revenue for the Company, we may co-invest in other joint ventures in the future with third parties through partnerships or other joint ventures, acquiring non-controlling interests in or sharing responsibility for any such ventures. In this event, we would not be in a position to exercise sole decision-making authority regarding the joint venture and, in certain cases, may have little or no decision-making authority. Investments through partnerships or other joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt, fail to fund their share of required capital contributions, make dubious business decisions or block or delay necessary decisions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals,and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our executive officers, senior management and/or directors from focusing their time and effort on our business. Consequently, action by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.

 

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We cannot guarantee that we will succeed in achieving our goals, and our failure to do so would have a material adverse effect on our business, prospects, financial condition and operating results.

Some of our hempSMART™ products are new and are only in the developmental stages of commercialization. We are not certain that these products will function as anticipated or be desirable to their intended markets. Also, some of our products may have limited functionalities, which may limit their appeal to consumers and put us at a competitive disadvantage. If our current or future hempSMART™ products fail to function properly or if we do not achieve or sustain market acceptance, we could lose customers or could be subject to claims which could have a material adverse effect on our business, financial condition and operating results.

As is typical in a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Because the market for our Company is evolving, it is difficult to predict with any certainty the ultimate size of this market and its growth rate, if any. We cannot guarantee that a market for our products will develop or that demand for our products will emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.

The Company’s failure to continue to attract, train, or retain highly qualified personnel could harm the Company’s business.

The Company’s success also depends on the Company’s ability to attract, train, and retain qualified personnel, specifically those with management and product development skills. In particular, the Company must hire additional skilled personnel to further the Company’s research and development efforts. Competition for such personnel is intense. If the Company does not succeed in attracting new personnel or retaining and motivating the Company’s current personnel, the Company’s business could be harmed.

The loss of key management personnel could adversely affect our business.

We depend on the continued services of our executive officers and senior management team as they work closely with independent associate leaders and are responsible for our day-to-day operations. Our success depends in part on our ability to retain our executive officers, to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our management team. Although we have entered into employment agreements with our senior management team, and do not believe that any of them are planning to leave or retire in the near term, we cannot assure that our senior managers will remain with us. The loss or limitation of the services of any of our executive officers or members of our senior management team, or the inability to attract additional qualified management personnel, could have a material adverse effect on our business, financial condition, results of operations, or independent associate relations.

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There could be unidentified risks involved with an investment in our securities.

The foregoing risk factors are not a complete list or explanation of the risks involved with an investment in the securities. Additional risks will likely be experienced that are not presently foreseen by the Company. Prospective investors must not construe this the information provided herein as constituting investment, legal, tax or other professional advice. Before making any decision to invest in our securities, you should read this entire prospectus and consult with your own investment, legal, tax and other professional advisors. An investment in our securities is suitable only for investors who can assume the financial risks of an investment in the Company for an indefinite period of time and who can afford to lose their entire investment. The Company makes no representations or warranties of any kind with respect to the likelihood of the success or the business of the Company, the value of our securities, any financial returns that may be generated or any tax benefits or consequences that may result from an investment in the Company.

Risks Related to the Company

Uncertainty of profitability

Our business strategy may result in increased volatility of revenues and earnings. As we will only develop a limited number of products at a time, our overall success will depend on a limited number of products, which may cause variability and unsteady profits and losses depending on the products and/or services offered and their market acceptance.

Our revenues and our profitability may be adversely affected by economic conditions and changes in the market for our products. Our business is also subject to general economic risks that could adversely impact the results of operations and financial condition.

Because of the anticipated nature of the products that we offer and attempt to develop, it is difficult to accurately forecast revenues and operating results and these items could fluctuate in the future due to a number of factors. These factors may include, among other things, the following:

•       Our ability to raise sufficient capital to take advantage of opportunities and generate sufficient revenues to cover expenses.

•       Our ability to source strong opportunities with sufficient risk adjusted returns.

•       Our ability to manage our capital and liquidity requirements based on changing market conditions generally and changes in the developing legal medical marijuana and recreational marijuana industries.

•       The acceptance of the terms and conditions of our multi-level sales agreements.

•       The amount and timing of operating and other costs and expenses.

•       The nature and extent of competition from other companies that may reduce market share and create pressure on pricing and investment return expectations.

•       Adverse changes in the national and regional economies in which we will participate, including, but not limited to, changes in our performance, capital availability, and market demand.

•       Adverse changes in the projects in which we plan to invest which result from factors beyond our control, including, but not limited to, a change in circumstances, capacity and economic impacts.

•       Adverse developments in the efforts to legalize cannabis or increased federal enforcement.

 

•       Changes in laws, regulations, accounting, taxation, and other requirements affecting our operations and business.

•       Our operating results may fluctuate from year to year due to the factors listed above and others not listed. At times, these fluctuations may be significant.

 

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Management of growth will be necessary for us to be competitive.

Successful expansion of our business will depend on our ability to effectively attract and manage staff, strategic business relationships, and shareholders. Specifically, we will need to hire skilled management and technical personnel as well as manage partnerships to navigate shifts in the general economic environment. Expansion has the potential to place significant strains on financial, management, and operational resources, yet failure to expand will inhibit our profitability goals.

We are operating in a highly competitive market.

The markets for businesses in the hemp industry is competitive and evolving. In particular, we face strong competition from larger companies that may be in the process of offering similar products and services to ours. Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources and larger client bases than we have (or may be expected to have).

Given the rapid changes affecting the global, national, and regional economies generally and the cannabis and hemp industries, in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to keep pace with any changes in its markets, especially with legal and regulatory changes. Our success will depend on our ability to respond to, among other things, changes in the economy, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition, operating results, liquidity, cash flow and our operational performance.

It is unknown whether the passage of the Farm Bill will provide us trademark protection for our hempSMART™ brand and products.

We have applied for a trademark for our hempSMART™ brand name. Before passage of the Farm Bill, we were uncertain that we could obtain patent or trademark protection for our products Because hemp derived CBD was considered an illegal Schedule 1 drug under the CSA at the time. With the passage of the Farm Bill, we may be able to overcome these uncertainties, since hemp containing less than 0.3% THC is no longer a Schedule 1 drug under the CSA. However, we cannot guarantee more favorable treatment and the failure to obtain trademark protection may materially impac